India allows foreign airlines to buy stakes in local carriers

A fuel tanker moves past Air India passenger jets parked at an airport in Kolkata May 6, 2012.Rupak De Chowdhuri

NEW DELHI (Reuters) - India decided to allow foreign airlines to buy stakes of up to 49 percent in local carriers, a long-awaited policy move that could provide a lifeline to the country's debt-laden airlines by opening up a fresh source of funding.

The move, which comes with conditions, is a part of massive big-ticket reforms announced by India on Friday, including opening up its supermarket sector to foreign firms, as it seeks to revive economic growth and avoid a ratings downgrade.

"This is a very positive step," said Amber Dubey, head of aviation at KPMG. "I do not expect a flurry immediately ... but there will be interest. A lot of people have been watching."

Ailing Kingfisher Airlines (KING.NS), which was India's No. 2 local carrier a year ago but has since grounded most of its fleet, has lobbied hard for this move on hopes that it can attract a foreign airline investor, although none has publicly expressed interest.

Kingfisher, whose fortunes hang on its ability to raise funds soon, said the move will allow it to re-engage with prospective investors in a "more meaningful manner."

"This will open up a wide range of opportunities for both Indian carriers and foreign carriers who wish to participate in the strong growth potential for civil aviation in our country," Kingfisher, controlled by liquor baron Vijay Mallya, said.

Newly affluent Indians, with increasing disposable incomes, have started treating flying as a mode of transport rather than a luxury, providing a massive local market.

"It sends a clear message to the sector which was under financial stress - now even the banks would look at them favourably," civil aviation minister Ajit Singh said.

However, any global carrier eyeing a stake in an Indian carrier must weigh up the benefits of a market with high long-term growth potential but one that has been squeezed by high costs and fierce price competition.

EASED RULES WITH RIDERS

The relaxed rules do come with some riders, said Singh.

Interested companies will have to get clearances from Foreign Investments Promotions Board and the ministry, and three quarters of their directors have to be Indians, Singh said.

"They will have to follow all the rules like plane acquisition, and route disbursal laid down by the ministry," Singh added.

The 49 percent limit includes both foreign direct investment and foreign institutional investment, according to a government document seen by Reuters.

"The results are unlikely to be immediate ... Just because they are now allowed to invest does not necessarily mean that they will," the Centre for Asia Pacific Aviation, a consultancy, said.

Budget carrier SpiceJet (SPJT.BO), the fourth-largest of India's six main airlines, said on Thursday it was in initial talks with several Gulf carriers and was waiting for the government to ease rules before it takes a final call.

With global airlines buffeted by the European debt crisis and high fuel costs, cash-rich and fast-growing Gulf carriers such as Dubai's Emirates , Qatar Airways and Abu Dhabi's Etihad are seen as the most likely buyers of stakes in Indian carriers, analysts say.

Boeing Co (BA.N) raised its forecast for the Indian plane market on Tuesday, saying the South Asian country would need 1,450 new aircraft worth $175 billion by 2031. (Additional reporting by Rajesh Kumar Singh in NEW DELHI and Henry Foy in MUMBAI, editing by Rosalind Russell)